The NAMA scheme is a failed design

We love the blame game in Ireland, and perhaps over the summer break, we might have gotten out of practice, so here’s something that might refresh the rage.

The question “is NAMA working” is frequently asked, and in truth, the jury is still out as we monitor how NAMA is managing its assets.

But we can say at this point that the NAMA scheme, or the NAMA design, has failed.

Because of the very high haircuts imposed on loans acquired by NAMA, both Anglo and INBS – which represented the sources of 60% of the loans acquired by the Agency – have become unviable as financial institutions and are being run-down.

As for the other three NAMA financial institutions – AIB, Bank of Ireland and EBS – the €30bn of loans acquired by NAMA were such a tiny fraction of those institutions’ €250bn loan portfolios, that the NAMA process has made diddly-squat difference to their risk profiles. What NAMA actually did was made a bad situation worse, and in all likelihood contributed to the circumstances in 2010, when the market lost faith in our banks, which ultimately led to the Troika bailout.

What is unforgivable is the reckless absence of validation of true loan values before NAMA was formed in 2009, validation which would have shown that the NAMA design couldn’t work. What is sinister is the Wikileaks evidence that there was some private validation which showed the loans were in worst condition that publicly acknowledged, but that validation was never published. “True” loan values will be a moveable feast of course, and as the property market declined, so did the value of those loans, but there doesn’t appear to have been any consideration in 2009 of the consequences of the loans being so badly impaired that even after the NAMA process, the banks would fail and would need massive bailouts.

We saw last week with the publication of the half-year accounts for IBRC – the name of the company formed from the merger of Anglo and INBS – that even after NAMA had extracted €44bn of loans from Anglo and INBS, what remained at IBRC were over €28bn of loans, mostly commercial property with a staggering 66% of the loans impaired. IBRC is closing its residual INBS branches, is not generating any new business and is winding down its loans and operations before 2020. As far as IBRC is concerned, NAMA has done nothing but hasten its descent into its zombified state. In fact, if NAMA hadn’t existed then we wouldn’t have run up eye-watering legal and other professional fees in valuing loans and transferring them from IBRC which after all is 100% state owned, to NAMA which is also 100% state owned. IBRC’s €44bn of loans transferred to NAMA represent 59% of NAMA’s total loan acquisitions.

AIB transferred €19bn of loans to NAMA for which it received €9bn. According to the AIB annual report for 2009, AIB had a total loan portfolio of €123bn. EBS, which has now been merged with AIB, transferred just €0.8bn of loans to NAMA for which it received €0.4bn. According to the EBS annual report for 2009, EBS had a total loan portfolio of €17.2bn. Bank of Ireland transferred €10bn of loans to NAMA for which it received €6bn. According to the Bank of Ireland annual report for 2009, Bank of Ireland had a total loan portfolio of €106bn.

In other words, €30bn was transferred from AIB, EBS and Bank of Ireland out of a total loan portfolio of €246bn. NAMA carefully valued these loans and paid €16bn for them. So the banks received nice clean cash equivalent funds but they had to crystallise large losses. If NAMA had not existed, these banks would be managing those loans today, would be obtaining cash advances from the ECB secured on these loans and would be offering them for sale and generally working out the loans. What NAMA has done is impose a massive administration and cost burden on these banks, forced them to crystallise losses now and deprive the banks of a portion of their stock-in-trade to generate profit and cash flow. If NAMA had not existed, it is hard to see how the operations of these banks would have been disadvantaged today.

It is a fact that deposits at AIB and Bank of Ireland, and non-NAMA bank Permanent TSB, have stabilised and since July 2011, in fact have gently grown. But would depositors have been deterred by AIB/Bank of Ireland having €30bn of property development loans of doubtful value in the context of nearly €250bn of total lending? Given the mortgage crisis that intensified after the NAMA transfers, and the fact that AIB and Bank of Ireland are both heavily exposed to mortgage lending, you would have to challenge the notion that it was the removal of the fraction of loans that went to NAMA, that stabilised the banks and inspired the confidence amongst depositors to stop withdrawing funds. The evidence suggests that it was in fact the stress-testing of the banks in March 2011, followed by massive recapitalisation and the intensive oversight by the bailout Troika, particularly the ECB that boosted depositor confidence. Not the NAMA process.

The NAMA process has transferred an additional €5.6bn in state aid to the banks, state-aid which is mostly represented by the long term economic value premium which the NAMA scheme involved. We, the public are on the hook for this state aid which is additional to the €64.1bn pumped into the banks. NAMA’s early years are proving challenging with loans declining further in value, and you would have to say that in 2012, we cannot be confident that NAMA will break even by 2020, the short to medium term outlook in particular is challenging. The NAMA scheme may have removed a modicum of doubt over the value of the banks, but there has been a transfer of doubt onto the shoulders of the nation, as we wait to see how NAMA performs.

So who do we blame? The late Minister for Finance Brian Lenihan was the minister who approved the NAMA scheme and it was he who led the legislation through the Oireachtas and then defended the Agency from its inception in December 2009 until his departure from government in February 2011. A man for whom there is justifiably a lot of regard, the fact remains that NAMA and the preceding bank guarantee are his legacies. And whilst Brian Lenihan might have sadly shuffled off this mortal coil, his boss, Brian “we are not fucking nationalising Anglo” Cowen deliberately vanished from the national stage in February 2011 but the buck stopped with him.

We can certainly blame the Secretary General at the Department of Finance during 2009, David Doyle and his deputy Kevin Cardiff (picture above) who was subsequently promoted to Secretary General in February 2010 where he clocked in until his ignominious exit/glorious promotion at the start of 2012. Kevin Cardiff might be best remembered for being at the helm when the €3.6bn error in the national accounts was uncovered, but far more serious was the Wikileaks revelation/claim that he had hinted to the US ambassador to Ireland, in early 2009 that the ultimate discount on loans transferred from the banks to NAMA might be 50%, instead of the 30% that was publicly discussed. With a property market still tanking some months later at the end of 2009, it should have been obvious that the discount would have been nearer 60%, at which point, the banks were mostly rendered zombified and in need of substantial further bailouts. And consequently, the NAMA scheme could not have worked.

We can probably blame Minister Lenihan’s special adviser from March 2009, Dr Alan Ahearne (picture above), who, after his adventure at the Department of Finance, returned to lecturing at the National University of Ireland in Galway, and at the same time was ennobled with an appointment to the board of the Central Bank of Ireland. Earlier this year, Dr Alan penned an article for the Independent in which he attacked critics of NAMA, accusing them of moving the goalposts, which was rich when that is precisely what Dr Alan does by advancing as his main justification for NAMA, the saving to the State of working out €75bn of loans over a longer period of time than would otherwise have been allowed under the Troika-mandated deleveraging targets. The problem with Dr Alan’s contention is, back in 2009 when NAMA was conceived, there was no Troika, it only arrived on the scene in November 2010. Dr Alan deserves to be stoned if he is suggesting he had the prescience in 2009 that the country would enter a bailout programme in late 2010 which would involve the mandatory sale of bank of assets. Furthermore it is eminently arguable that it was NAMA’s crystallisation of losses in the banks in March to May 2010 when the first tranche was transferred, which ultimately forced this country into a bailout. Instead of 30% haircuts, we had 60% haircuts and the markets were justifiably spooked with concerns about the remaining loans, particularly commercial property.

And lastly we can probably blame Peter Bacon, the economics consultant who was the darling of the last administration but more recently seems to have fallen from favour, with his Treasury Holdings-sponsored report not doing anything to recover his fortunes. In April 2009, Peter produced a report “Proposal for a National Asset Management Agency” – note that just the abridged version of the report is in the public domain – which addressed €80-90bn of lending in the banks, but failed to address the difficulties that would be caused if the discount on the loans was too severe. Peter’s report did recommend that all doubts be removed on the capital adequacy of banks but only dealt with a quarter of the extant lending, and we now have issues with the residual property lending that NAMA left in the banks, not to mention the residential mortgage books. Of course hindsight is a terrific advantage but looking back at the report today, it is still surprising that no consideration was given to the depth of the hole that NAMA could leave behind in the banks after crystallising losses.

The distinction between the NAMA project and the organisation NAMA should be made. The NAMA organisation has done the job assigned to it in the NAMA scheme, though the jury is still out on how well it is doing that job. It is the NAMA scheme that was wrongly designed, and the singular failure was not validating the loan losses at any early stage. If NAMA had not existed, then we would have avoided colossal administrative costs and time, there is strong evidence we would have avoided a bailout and consequent deleveraging of banks at the behest of the Troika, we would not have the risk of the NAMA operation on the nation’s finances and we would have banks whose expertise was in loan workouts, managing the loans today.

The NAMA design or NAMA scheme did not work.

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16 Responses

And we should remind ourselves of the specific purpose of Nama as stated in the legislation. And if we assume that the people drafting the legislation placed the most important objective first in the list, then on that basis Nama has failed miserbaly.

—The purposes of this Act are—
(a) to address the serious threat to the economy and the stability of credit institutions in the State generally and the
need for the maintenance and stabilisation of the financial
system in the State, and
(b) to address the compelling need—
(i) to facilitate the availability of credit in the economy of the State,
(ii) to resolve the problems created by the financial crisis
in an expeditious and efficient manner and achieve
a recovery in the economy,
(iii) to protect the State’s interest in respect of the guarantees issued by the State pursuant to the Credit Institutions
(Financial Support) Act 2008 and to underpin
the steps taken by the Government in that
regard,
(iv) to protect the interests of taxpayers,
(v) to facilitate restructuring of credit institutions of systemic
importance to the economy,
(vi) to remove uncertainty about the valuation and
location of certain assets of credit institutions of systemic
importance to the economy, and
(vii) to restore confidence in the banking sector and to
underpin the effect of Government support
measures in relation to that sector.

This thing will never be sorted out until we get our heads around the so called moral hazard. NAMA and indeed the banks must be encouraged to deal with delinquent borrowers without a fear of backlash. It will mean some people will take advantage (although this can be dealt with retrospectively) but for the greater good the banks must be allowed and even directed to make deals that involve reductions of debt. It does not necessarily mean write offs and some form of property appreciation right should be part of the solution particularly where there is a trading asset that can be saved. The american commentator John Hussman has suggested how this should work see hussmanfunds.com/wmc/wmc090223.wtm

Occam, the banks you speak of (Irish) are themselves delinquent borrowers. Will German et al banks deal with them without fear of backlash? The moral hazard goes way back. The initial lenders, and political system that oversaw those lenders (German, Dutch et al), are not yet calling themselves out. If this crisis doesn’t get back up the line I would suggest it will get uglier and uglier as time stretches out. I agree that banks must be directed to reduce debts – that is to say all banks all the way back.

Wow. It feels like the Bank of Spain could have written this post in defense of their own strategy as what you argue is basically what the Spanish have tried — which is to give the banks time to restructure and wait for the market to recover. How’s that worked for the Spanish? Funny how the Spanish are also now introducing a bad asset management scheme.

Sticking the costs to non-resident creditors of the banks is the easy armchair call but how well would that have worked when the vast majority of non-resident credit to the Irish banks was in the form of deposits? You would have triggered a full blown deposit run and ended up bankrupting not just Anglo and INBS but AIB and BOI as well.

Iceland isn’t much a model for Ireland for exactly this reason — its banks relied much less on foreign deposits and you’ll recall the entire Icesave scandal was triggered by the Icelandic gov’t’s attempt to whack foreign bank depositors.

Iceland also had the ability to slap on capital controls which Ireland as an EU member could not have done without running afoul of EU law. In any event, it is also clear the ECB — righ or wrong — would not have conitinued liquidity support in the context of large private creditor haircuts.

So really the only genuine alternative would have been an exit from the euro, a massive devaluation, capital controls and defaults on external liabilities. How you can say with any certainty that this would have been a lower cost solution?

I always suspected that the entire thing was nothing more than a bailout for the wealthy developers who propped up Fianna Fail. This has been confirmed by the fact that NAMA are now stating that they’re only going to pursue the developers for what NAMA paid for the loans, and not, as was originally stated, what they borrowed from the banks. If the point of the whole thing was to give the wealthy developers a write-down and get the banks off the likes of Johnny Ronan’s backs, then the thing may well have been a wonderful success.

@delacaravanio. You wrote that, “NAMA are now stating that they’re only going to pursue the developers for what NAMA paid for the loans, and not, as was originally stated, what they borrowed from the banks.”

This is news to me. Could you give a reference to where they stated that?

I know that Davy Stockbrokers track record for advice leaves something to be desired, but on the assumption that they have to be right some of the time, they are advising in their latest report on Irish mortgages that there is an €11 billion loss waiting in the belly of the banks and that over 50% of all mortgages are underwater.

As Kyle Baker says in relation to the NAMA alternative, “the only genuine alternative would have been an exit from the euro, a massive devaluation, capital controls and defaults on external liabilities.”

I recently visited Germany, where they are bitching big time about bailing out the PIIGS and how much it is costing the German people. The euro and the european dream has ended as far as Otto in the street is concerned. The gossip was all about the new Deutschmarks that are “currently being printed” (who knows?). Mr Baker’s alternative may still be the option in the end, because our economy is going nowhere under the present policy – if you could call it that.

Four years of impotent action. It’s been akin to “bulling a dead cow” as they say in my part of Meath. You can only take so much negativity. That’s why, following the example of our educated youth, who are leaving in droves – I’m off this year.

Maximising the return from our loan portfolio at a minimum means recovering the cost of acquiring the loans plus carrying costs and any working and development capital expenditure advanced to debtors.

@NWL – NAMA has achieved exactly what it was really designed to do!

It allowed zombie banks (Irish and European) to stay alive and socialise their losses.

The unfortunate thing for the then-in-power stupid politicians is that if they had allowed the banks to go under, then the bank debt legacy and personal debt legacy from the double-bubble era would have been restructured automatically to accommodate the cash-starved 2008 credit-crisis.

Now with rampant money printing in the US and UK – the “Too Big To Fail” banks have gotten bigger and richer and are sitting on cash piles ready to go shopping.

Expect the now-in-power stupid politicians to sell off utilities to them for a song, whilst holding on to the empty bank husks.

@NWL, I meant to say “congratulations!” This is an excellent post and when the history of the NAMA period comes to be written it will be an important reference for researchers.

@WGU, Frank did say “at a minimum”…. I think that he may still enjoy the fragrant odour of the WAGs’ underwear, even if the fetish is not as much fun as it used to be.

I also believe that the last thing that the warders in NAMA want to see is any celtic tiger developers’ flags flying over any NAMA assets in the future. It’s over for Johnny, Richard, Liam, Bernard et al. They may be released from the prisoner’s chains of NAMA, but the ending allows no re-birth.

I hate saying it but we are where we are and we have to accept that Nama is here to stay. I still believe it could act as a catalyst for regeneration but it really needs to get into gear. It should focus on those cases where there are cooperative borrowers who may have the wherewithal to service a reduced debt. In some cases there may be a third party investor who will inject some cash or else NAMA (or the bank) should retain a property appreciation right. There are many people buried in consortiums who are willing to face up to the consequences of their borrowing and the price of recovery should not be at the cost of other viable businesses. Is Nama trying too hard to find a perfect solution that is not possible ?
‘Dans ses ecrits, un sage Italien
Dit que le mieux est l’ennemi du bien’

For folks that are interested, there is a good paper by the World Bank/Daniela Klingebiel from 2000 that looks at the history of asset management companies as banking crisis resolution mechanisms. The reality is that experience has been very mixed and context including the global economic environment seems very important.

The Swedish and U.S. experiences (with Resolution Trust Corp in the late 1980s/early 1990s) are often cited as the major successes. But Sweden was helped by the fact that the banking problem was a much smaller share of Swedish GDP and the Swedish economy got a huge shot in the arm with a major devaluation of the krona in the context of the 1990s global economic boom, which allowed bank asset values to recover much more quickly than expected.

In the U.S., RTC was only created after the initial attempts to tackle the S&L crisis failed miserably because of heavy political interference (as Winston Churchill said, Americans always do the right thing after exhausting the alternatives…).

For Ireland, several things standout relative to the historical experience with AMCs: the inability to devalue the currency, a global recession of the kind not seen since the 1930s, a banking sector that was several times GDP (even if just including the domestic banks) AND the absence of an effective bank and household bankruptcy regime.

This last point crucial as the research shows that effective bankruptcy regimes are absolutely key to successful AMCs. To be fair, Ireland isn’t that much different from the rest of Europe in its lack of these tools. In the U.S., we take the FDIC for granted but it wasn’t until the global crisis that one realized that the FDIC toolkit is relatively rare in other countries (similar story for personal bankruptcy which is pretty forgiving to debtors in the U.S.). That’s now changing in Ireland but the initial absence of these tools has to be a major part of NAMA’s “failure” to date.

@NWL, I meant to say “congratulations!” This is an excellent post and when the history of the NAMA period comes to be written it will be an important reference for researchers.

I couldn’t agree more, with who shot the tiger. NWL deserves a medal, but I’m a little surprised that no-one has “tried ” to stop the process.
Not only is this blog ” an important reference for researchers”, I find it invaluable, over and beyond the interpretations of our national newspapers.

Some of the commentary, was good also – refreshing to see debate in the blogosphere where it is near absent (apart from V.B.’s efforts) on the television.

Conspiracy theorists may suggest that traditional media is censored in this country – well, it does look like that.

But who ever thought that Nama would work? Apart from Bacon and Co?
Or were they just thoughts expressed into actions, rather than workable plans.
I asked a local genius who worked with IBEC for his opinion at the time, and he said “its the only game in town”, as if that means anything of substance. But it is conceivable that the “others” had the very same hymn book – more about music than money.

Bacon did a bit of a job of creating distance, when he declared that Nama had become a debt collection agency, and not what he had envisaged. Great.

Another local genius told me at the time, that Ahearne was very intelligent – she was in the same class as him, but now it is clear that she was using him as a reference to herself; same class, so similar intelligence. Great; so now I know two bluffers, who were in the same class.

Anyway good luck who_shot_the_tiger, abroad. I often think about what Richard Tol said, before he left these shores.

@Michael. Thank you. The sentiment is much appreciated. It is not an easy choice to leave. In keeping with many others, past and present, my family will be divided. But four years of depression (in every sense of the word) , and as Professor Tol says, no prospect of any change for the better during the next decade in Ireland, leaves no real option. There is no secure future awaiting my family abroad [probably New York to join John Gallaher :-) ], but there is hope for a better life than can be found here.

How can you live, feel challenged or fulfilled in a country with no banks, no domestic economy and where the only prospect, for the foreseeable future, is one of further distress?

@ who_shot_the_tiger
No one would blame you. The real recession is just about to start. Talk of the next budget, is utter crap – its as if the next two budgets, are not to occur, shaving another 6bn on top of the upcoming.

On one hand, an economy needs young people – on the other, they must leave.

On one hand, we need Banks to lend – on the other, the domestic economy is such that we really don’t need loans.

On one hand, we need “a society” – on the other, we cannot reform enough, to produce an equitable one.

Lucinda sees a likeness between Germany and Ireland – Constantin is not so clear.

Charlie Bird is “talented enough”, to secure an 80k pension – other pensioners are unable to quantify their talents, to such a degree.

One “Government”, can insist that there will be no bailouts – the very same one, will implement them.
“We” don’t want foreigners – we were present, when “we” invited them.

We need a new Bank – existing schemes like Nama, prevent this – and no one can countenance a back pedal manoeuvre to correct it.

We want turf – we don’t want turf.
We have Fish, we can’t fish.
We have rain – we have water charges.
We want houses – we can’t afford them – so lets tax them.

Bank debt is not to be thrust onto the taxpayer – it is.
We have democracy – we’re not in a position to yield it.

“Embrace paradox, ambiguity and contradiction, as it is the womb of creativity” (Chopra) – well we’re getting good at embracing it, but the creativity will take time. In fact the creativity which is visible on the ground, is designed to crush further creativity, rather than to nurture it.

The only reason why anyone with a young family, hasn’t already left our shores, is that they don’t see what is coming, or they are part of a toxic system which will protect them, without thought.

I do fear that as Austerity collapses the real, particularly the GNP Economy – the one that ultimately has to eventually pick up all the Bills for the whole Mess and somehow also try and get people’s overall situation back on track for the longer term future – that even more problems will start to mount up for the remaining Taxpayer backed banks as Domestic collapse feeds into more Mortgage Arrears and bankruptcies for the Banks . Possibly as the NAMA Plan goes nowhere quickly social unrest and political instability compound the problems and the country goes into a much more awkward terminal unravelling . If that is the case the whole assumptions around the NAMA plan will have certainly played a major part . Yours Sincerely, Peter Pipesmoker .